Know Your Indicators - DMI/ADX
Most strategies or techniques in technical analysis involve the use of indicators.
But more often than not, most traders use indicators for all kinds of situations which tend to render them quite ineffective.
Just as a carpenter’s toolbox has different instruments which are used for different purposes, each indicator in the tool box of a trader has to be used for a particular situation.
In our Live Trading Room we teach, among many other things, a series of lessons we call “Know your Indicators”, which introduce specific indicators, and go over the characteristics and drawbacks of the same.
First and foremost, there is one point that a trader needs to keep in mind - all indicators are lagging, and it is ultimately price which is the only leading indicator.
Indicators should be used just as they are described – as “indications” for price movements and not as confirmations. While this does not diminish the importance of the indicators, one must remember that a change in price will cause a change in the indicator - not the other way round.
Indicators, nevertheless, play an important part in the building of strategies and techniques - but only if one applies them correctly.
The DMI/ADX is one of the most effective and yet underused indicators. If used with the correct parameters, it can be a very effective trading system on its own. (more…)
